Q2 2025 AZZ Inc Earnings Call
Speaker Change: and John.
Speaker Change: Good day, and welcome to the AZZ second quarter, 2025 earnings conference call and webcast.
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing with starkly followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on a touch tone phone. To withdraw your question, please press star and two.
Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin's three-part advisors. Please go ahead.
Sandy Martin: Thank you, operator. Good morning and thank you for joining us today to review AZZ's financial results for the fiscal 2025 Second Quarter, which ended August 31, 2024.
Sandy Martin: Joining the call today or Tom Ferguson, President and Chief Executive Officer, Jason Crawford, Chief Financial Officer and David Nark, Senior Vice President of Marketing, Communications and Investor Relations Officer.
Sandy Martin: After today's prepare remarks, we will open the call for questions. Please note the live webcast for today's call can be found at www.azz.com-investor-events.
Sandy Martin: Before we begin, I want to remind everyone that our discussion today will include forward-looking statements made under the Safe Harbor provisions of the private securities litigation reform Act of 1995.
Sandy Martin: By their nature, forward-looking statements are uncertain and outside the company's control.
Sandy Martin: Except for actual results, our comments containing forward-looking statements, may involve risks and uncertainties, some of which are detailed from time to time and documents.
Sandy Martin: filed by AZZ with the Securities and Exchange Commission, including the annual report on form 10 K for the fiscal year. These statements are not guarantees of future performance, therefore undo reliance should not be placed upon them. Actual results could differ materially from these expectations.
Sandy Martin: In addition, today's call will discuss non-gap financial measures.
Speaker Change: Non-Gap Financial Measure should be considered supplemental to not a substitute for Gap Financial Measures. We refer to the reconciliation from Gap to Non-Gap Measures in today's earnings pressure release. I would now like to turn the call over to Tom Ferguson.
Tom Ferguson: Thank you, Sandy. Good morning and thank you for joining us. Today I would discuss the second quarter results and cover our outlook for the rest of the year. Jason Crawford will review our detailed financial results and Dave Nark will provide an industry update on sales to our end markets.
Tom Ferguson: Then we will open up the call for questions.
Tom Ferguson: We are pleased this year with the team's emphasis on business execution and productivity improvements. And we continue to focus on what matters most, delighting customers through exceptional service and quality and innovative solutions.
Tom Ferguson: Top-length sales momentum continued in the second quarter, and sales grew by 2.6% to $49 million compared to the prior year's quarter.
Tom Ferguson: We reported another quarter of expanded EBITDA dollars in margins compared to the prior year.
Tom Ferguson: As a result, we generated meaningful cash flow from operations of $119 million for the first half of our fiscal year.
Tom Ferguson: Compared to the prior year's quarter, metal coating sales increased by 1% and pre-cout metal sales increased by 3.8%. Do primarily to market share gains.
Tom Ferguson: Organic sales in both segments grew almost entirely based on volume due to higher steel and cool coding tonnage processed in the quarter.
Speaker Change: As Dave will cover in more detail, we benefited from AZ's diversified in markets and the continued growth in certain markets like construction.
Speaker Change: The construction-related markets represented 57% of our combined coding sales, and were driven by strength related to infrastructure projects, including bridge and highway transmission and distribution and renewables.
Speaker Change: This critical infrastructure spending tracks closely to public sector construction, energy, and manufacturing.
Speaker Change: We are optimistic that Fed actions to lower interest rates may spur greater capital spending into calendar year 2025.
Speaker Change: Continuing with the summary of our results, Melalcoatians delivered a strong EBITDA margin of 31.7%. Exceeding the prior year in our target margin range of 25 to 30% due to higher volume, and improves the productivity and cost.
Speaker Change: Preco-Mettles EBITDA, Margin of 21.1% was also strong due to higher volume, improved operational performance and better mix.
Speaker Change: This year's strategic objectives for AZZ are to drive revenue growth and improve the company's profitability through maximizing operational efficiencies.
Speaker Change: Executing our objectives well this year is generated significant cash flow to pay down debt and strengthen the business and our balance sheet.
Speaker Change: For the first six months of our fiscal year, our growth has been entirely organic. While we continue to evaluate both on acquisitions to add inorganic growth in each segment.
Speaker Change: We knew their rebuilding our acquisition pipeline would take several quarters as market transactions slowed after we paused to deliver and pay down debt.
Speaker Change: We plan to remain patient while evaluating the best timing, leverage, and target valuations in these markets.
Speaker Change: Jason will discuss our capital allocation strategy in a moment, but I want to emphasize that we will continue to seek high return on investment projects to drive growth. We will also continue to pay down debt and return capital to shareholders through our cash dividends.
Jason Crawford: We paid down $20 million of debt this quarter, and once again reprised our term loan last month to lower interest cost by another 75 basis points.
Jason Crawford: An important investment this year is our construction of the new aluminum coil coating facility in Washington, Missouri. This facility will expand capacity in the aluminum container sector, where we anticipate sustainable long-term growth to occur.
Jason Crawford: We continue to track on schedule and budget and expect to be operational in early fiscal year 2026. As a reminder, this facility's production and capacity will benefit from a long-term contract with one customer, committed to 75% of the new sites capacity.
Jason Crawford: We were excited about the progress of the new plan. With that, I'll turn it over to Jason.
Jason Crawford: Thank you to all my good morning. For the second quarter, we reported sales of $49 million and increased a 2.6% from the prior year quarter. By segment, our metal coating sales increased 1% and pre-cote metal sales increased 3.8%.
Jason Crawford: The second quarter's gross profit was $103.5 million, or 25.3% of sales, and increase of 90 basis points from 24.4% of sales in the prior year quarter.
Jason Crawford: Gross Martins improved in both segments and proved zinc product of the A&Cost helped offset labor and other variable cost increases in the metal coating segment, whereas higher volume improved operational performance and better mix helped offset the same headwinds in the pre-cote metal segments.
Jason Crawford: Selling General and Administrative Expenses worth 35.9 million dollars in the second quarter, or 8.8% of sales. A slight improvement versus a 36.2 million dollars or 9.1% of sales in the prior year quarter.
Jason Crawford: Operating income improved to 67.6 million dollars or 16.5% of sales compared to 61 million dollars or 15.3% of sales in last year's second quarter.
Jason Crawford: Interested expense for the second quarter was $21.9 million compared to $27.8 million in the prior year.
Jason Crawford: This decrease is primarily due to consistently pain down debt and are lower weighted average interest rates from various debt reprisings, which I will discuss more in a few moments.
Jason Crawford: Acting in the earnings of unconsolidated subsidiaries for the second quarter increased to $1.5 million compared to $1 million from the same quarter last year. This increases due to higher earnings from our 40% G.V. ownership in a veil.
Jason Crawford: Current quarter income tax expenses was $12.2 million, reflecting an effective tax rate of 25.6% compared to 17.4% in the prior year quarter, where we benefited from the reversal of previously provided tax positions related to the acquisition of pre-court metals.
Jason Crawford: Reported net income from the second quarter was that a 5.4 million dollars compared to 28.3 million dollars for the prior year quarter. On an adjusted basis, Q2 adjusted net income was 41.3 million dollars compared to 37.2 million dollars, and increased about 11% from the prior year.
Jason Crawford: Second quarter adjusted EVIDa was $91.9 million or 22.5% of sales compared to $88.8 million or 22.1% of sales in the prior year.
Jason Crawford: This 40 basis point improvement in a justied EBITDA margin was primarily driven by improved earnings in revenue strengths and both segments.
Jason Crawford: Turning to our financial possession and balance sheet, we generated cash flow from operations of $19.4 million, ahead of last year's $18.3 million.
Jason Crawford: after funding capital expenditures for the first six months of 59.5 million dollars, a year to date free cash flow was 59.9 million dollars.
Speaker Change: As Tom mentioned, we are expanding our co-ocoding capacity by constructing a new 25-acre aluminum co-ocoding facility in Washington, Missouri. And we anticipated to be operational in early fiscal year 2026.
Speaker Change: We expect to spend approximately $6.2 million in the Greenfield Project this fiscal year, off which we have spent $35.6 million was paid in the first half of our fiscal year.
Speaker Change: are capital allocation strategy consists of investing in the business for growth.
Speaker Change: Ping down there.
Speaker Change: returning cash to our shareholders through dividends and evaluate and potential boat-on acquisitions.
Speaker Change: During the second quarter, which ended August 31st, we reduced debt by $20 million, and now it's back total debt repayments to exceed $100 million for the full year. Our current trailing 12 months debt to adjusted EBIDA is 2.7 times, which compares favourably to the leverage of 3.4 times in the second quarter of last year.
Speaker Change: On September 24th after our quarter-end, we reprised our turn-long B-down to so-for-class 2.5%. With the Fed also reducing interest rates around the same time, we expect these actions to have a favorable benefit to our earnings in the second half of the year.
Speaker Change: Our current interest rates for up agreements, fixes are variable interest rate for a national portion of our debt to a September 30th 2025 and we have no debt securities and total 2027.
Speaker Change: Finally, we paid a cash dividend to promise your holders of $5.1 million in the second quarter.
Speaker Change: with that I'll turn the call over to David Nark.
David Nark: Thank you, Jason. Good morning, everyone. Sales momentum for the second quarter was mixed across a number of end markets.
David Nark: On the positive side, sales within construction and electrical grew over the prior year, same quarter, driven by market share gains, as well as continued public sector spending on infrastructure projects, such as Bridget Highway, Transmission and Distribution and Renewables.
David Nark: Sales growth remained somewhat muted in the transportation category, which includes truck and trailer, bus, and recreational vehicles, up slightly as compared with the prior year quarter.
David Nark: by comparison.
David Nark: Sales within both consumer and industrial markets were down, driven by lower consumer spending and private investment. This is consistent with what we had communicated last quarter, when we said we were beginning to see public and private sector spending, trending and opposite directions.
David Nark: As we communicated during our first quarter poll, we were made optimistic about public sector spending.
David Nark: Additionally, we believe the recent Great Action by the Fed could spur growth in both consumer and private sector spending.
David Nark: We continue to see secular growth trends in reshuring of manufacturing, the migration to aluminum and pre-painted steel, as well as the conversion from plastics to aluminum in the container space that will continue to benefit our businesses. With that, I'd now like to turn it back over to Tom.
Tom Ferguson: Thank you, David. As I had communicated last quarter, we are optimistic about our business prospects this year, and again, want to remind you that our business is typically more frustrating to first and second quarters, as the spring and summer months align with peak construction activity.
Tom Ferguson: As David mentioned, we see signs that public and private sector spending are trending in opposite directions. We also know that weather such as hurricanes particularly, as well as macroeconomic events or changes, can impact our business. So we remain prepared for chopping us if it comes.
Tom Ferguson: We have accomplished what we set out to do in the first half of the year and look forward to continuing to focus on executing our plans for the balance of this year.
Tom Ferguson: As expected, the second half of fiscal 2025 will be lower than the first half due to the normal seasonal slow down and construction activity, as well as weather in the holidays.
Tom Ferguson: Also, recall that we are up against more difficult sales comparisons in last year's fourth quarter, as we reported total sales up 8.9%.
Tom Ferguson: Pekot sales in last year's fourth quarter delivered strong double digit sales growth up over 13% from the year prior.
Tom Ferguson: and while public sector spending geared toward infrastructure remains good, private sector spending as slow.
Tom Ferguson: and we expect the Fed loosening the monetary policy will stimulate growth over time.
Tom Ferguson: All this to say that we plan to be conservative with our annual guidance.
Tom Ferguson: Today, we are leaving our fiscal year sales guidance unchanged at $1.525 billion to $1.625 billion. Now, we are in our EBITDA guidance and raising our EPS expectations to reflect the strong first half and lower interest costs for the balance of this fiscal year.
Tom Ferguson: We are narrowing adjusted EBITDA guidance to 320 million to 360 million dollars.
Tom Ferguson: In increasing adjusted EPS guidance to $4.70 to $5.10. Our guidance reflects our best estimates given expected market conditions for the full year, lower interest, and analyzed effective tax rate of 24% and excludes any federal regulatory changes that may emerge.
Tom Ferguson: Capital expenditures for the current fiscal year are expected to remain unchanged at 100 to 120 million dollars, including approximately 63 million dollars related to the new Greenfield Plan.
Tom Ferguson: That paid down is now expected to exceed $100 million versus our previous range of $60 to $90 million.
Tom Ferguson: We continue to focus on paying down debt while evaluating both on acquisition opportunities that are beginning to build in our pipeline.
Tom Ferguson: The Executive Team and I recently met up toator strategic plan and evaluate our SWAT analysis.
Tom Ferguson: Based on a robust and collaborative analysis of AZZ's internal strengths and weaknesses and our external opportunities and threats we believe we are well positioned to sustain a successful track record for many years.
Tom Ferguson: We remain excited about our position as a leading provider of middle-finishing solutions, providing that aesthetic and corrosion-protective hot-dip galonizing coatings and other value-edged services for large and diverse end markets throughout North America.
Tom Ferguson: We will continue to focus on growing profitably by investing in people, processes, facilities and technologies that benefit AZZ's, metal coating and pre-code metals customers.
Tom Ferguson: Our culture creates opportunities for people to grow and develop, and we believe our deep branch of talent at every level positions as well for long-term success. I am confident that we will continue to win in the marketplace by focusing on the customer first.
Tom Ferguson: with a discipline execution of our strategic initiatives targeting sales growth, operational excellence, margin enhancements, and working capital improvements.
Tom Ferguson: We believe the successful execution of our career plan and our longer-term strategic initiatives will deliver significant free cash flow and maximize shareholder value for all AZC stakeholders.
Tom Ferguson: I am proud of the work and dedication of our teams in both segments and our corporate headquarters and I want to thank them again for delivering excellence in everything they do.
Tom Ferguson: Our value at it, lower risk, totally businesses.
Tom Ferguson: offer a customer's best-in-class experience with an unmasked competitive note based on her 65 years of experience and a legacy of exceptional customer service. Our board leadership team and segment teams are fully aligned to execute our near-term objectives this year and longer-term strategic growth plans.
Tom Ferguson: with that operator. I would like to open up the call for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then one on your touchtone phone.
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Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then too
Speaker Change: At this time, it will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Lucas Pipe with the Riley Security. Please go ahead.
Lucas Pipe: Thank you very much, operator. Good morning, everyone. My first question is on the M&A opportunity set, and I wonder if you could maybe speak a little bit to your appetite right here for acquisitions broadly, anything on the bolt-on side that is maybe more attractive and what the timing could look like, and also geographically, where would you focus?
Lucas Pipe: and I recall in the past, you looked at paint lines that maybe some of you have customers or competitors, that still makes sense here, I appreciate your thoughts on the M&A landscape. Thank you.
Speaker Change: Hey look at the, you know, we've got an active in the pipeline again and so, you know, within the galvanizing sector, we've got a lot of open space out there, so, you know, we're looking
Speaker Change: Call it to the Northwest Rocky region, but basically, and also the southeast.
Speaker Change: and there's a lot of, both, well, a lot of one-off two-off opportunities out there and then there's
Speaker Change: You know, what are two multi-site that...
Speaker Change: If they became available, we would be very active on those. We don't have anything in the works that I would say I'm anticipating closing before we talk again at the end of the third quarter or so. So I'll leave it at that.
Speaker Change: Pre-codeside, there's opportunities, these conversions of customers were active on that. You know, they take a few months to go through the process.
Speaker Change: and Work Through. But we've got a nice list of those as opportunities for the balance of this year and in the next year. The interesting thing about that is while we would always announce a galvanizing acquisition on these conversions because it involves a specific customer, it's probably not likely we'd announce the specifics on it. We would just talk about the fact that we completed one. [inaudible]
Speaker Change: I'll play that answer with your question.
Speaker Change: That is very helpful. Thank you for that context. In terms of the M&A for the business,
Speaker Change: Post the Missouri ram. Where do you think it would kind of level out?
Speaker Change: on Anastery Stereustay.
Speaker Change: in terms of just old-class sales growth, yeah in terms of overall capital spending.
Speaker Change: Oh, capital spending. Yeah, I think, you know, we've talked about it, each segment needs about $25 to $30 million in maintenance and with, you know, that includes some growth capital. So, call it 60 million between the two segments, a little bit of corporate for IT and things like that. We don't have anything.
Speaker Change: You know, and no other greenfields have been in the works. So I'd say that that's 60 million on a normal animal basis is about the right amount. If outside of acquisitions.
Speaker Change: Uh...
Speaker Change: And that's just the way it's stacking up. We're about to enter our planning process for next year and I'm sure we'll get, you know, we'll get some medals and requests for quite a few opportunities and as we do, we've got those carefully. We'll make sure we take care of safety, safety first, productivity, maintaining environmental capabilities and all that. So, you know, 60 is a good number. And if we find something else to be, you know, in the in the five 10 million range.
Speaker Change: for growth capital.
Speaker Change: Got it.
Speaker Change: Excellent, I really appreciate all the color to you and the team best of luck. I'll turn it over for now.
Speaker Change: Hi, thank you.
Speaker Change: The next question comes from John Franz Webb, with Sadody. We've got to go ahead.
Speaker Change: Good morning everyone, and thanks for taking the questions.
Speaker Change: I like to start with something you mentioned in the last conference call and we actually talked about in years past and that's reconstruction following our chains. I guess two questions. One, I know you have a facility in the North Carolina, South Carolina, one of the junior. Can that adequately address some of the lean on construction, but you don't have anything in the southeast as you just kind of pointed out. Can the Mississippi facilities address what's going on in Florida? I just kind of curious and like thoughts about that and also timing when that happens.
Speaker Change: Yeah, a great question. First, our thoughts and prayers just go out to the folks that are affected in the areas. We do have the one facility in Tampa. We were able to close it and evacuate the people, and there's a little bit of property damage. That's where we do have the out of Hurricane Harvey. We formed the AZZ Cares Foundation, which is a 501-C3 to support our folks and their families for exactly events like this. So on the people side, all our folks are safe, but they do have some property damage. We've got a facility in Virginia, a facility in South Carolina, and then we're in Alabama, Tennessee, Mississippi. And the thing I'd say about hurricanes is...
Speaker Change: Number one, the fabrication that's going to go on to support those is going to quite a lot of that because facilities are damaged within, particularly within Florida, but also some of the other states infected by Helene. So the fabrication is going to go on adjacent to those states. And so then you think about
Speaker Change: you know, our facilities that are stretched around those and by the way we do when you had Tennessee and we've got quite a bit of capacity on the go.
Speaker Change: Alvinizing Side within that sector. And then on the pre-code side, that, you know, that's sheet metal ribs, sheet metal siding, doors, all this stuff that kind of like on the stadium where you see, you know, loose ripped off, that stuff is going to be produced and painted in facilities that, you know, they don't have to be within those states. So we stand ready to support the recovery and rebuilding efforts and have the capacity to...
Speaker Change: You know, to go ahead and commit to whatever it takes for turnaround to help the businesses out. I'd say that, you know, the first reaction is just a rescue and recovery. So the first few months is probably a little bit within the facilities in those areas. A little bit of a lag as projects have to get restarted. So I'd say you usually see it with what's about it. [inaudible]
Speaker Change: Three to six months lag in terms of that ramp up to do the rebuilding work. And then due to the magnitude of what we've seen, that's going to continue on for a while. Just given the amount of bridge highway, rework, buildings, signage, you know, everywhere you look, towers, poles.
Speaker Change: So, yeah, I, three to six months is the lifetime.
Speaker Change: Thanks also for addressing the pre-code side because I was going to be one of my follow-ups, but I appreciate that to find out that they also participate in that reconstruction. The second question, I guess, I'm kind of curious about your thoughts about the volatility we're seeing in zinc prices and how that's helping or hurting the current pricing environment. The swings of the past six months have been shocking to me, I guess. I'm curious about your thoughts there and what should we think about that? I'm going to go forward with this because I'm not going to face some tough cops in coming quarters.
Speaker Change: Yeah, you know, as you know, so our things move through our kettles with about a 68-month lag from...
Speaker Change: from the LME. So we've got our zinc cost continuing to go down the balance of this year. The volatility and the pricing, you know, what that often affects is that the premiums move somewhat around it. So if you go back a couple of years, it was premiums were 32, 33, 35 cents and then think this year they're 18, 19 cents. So as zinc price goes, zinc LME cost goes up the premiums often adjust around that.
Speaker Change: So that's the first reaction. You know, we've done our best to we offer a whole...
Speaker Change: Package of value added services and so we've, you know, in most ways we've disconnected our end price from that Zinc cost, then underline Zinc cost.
Speaker Change: I will say when you got this kind of volatility, it tends to be easier to move the total price up just because the zinc costs are moving around and different competitors are.
Speaker Change: You know, having to buy spot versus what they've got already purchased so you know we're watching it carefully because we've seen forget how long ago it was but not that many years ago where it popped up over two dollars and that tends to drive the overall price level of galvanizing up and and yet it's still a small part of the total projects.
Speaker Change: So it doesn't drive it up to the point that they switch to a different process.
Speaker Change: but right now it's not causes any great concern but it and I'll also say another thing. This is when they handle all.
Speaker Change: and Thomas get where we're coming into that season, November, December, where they're.
Speaker Change: Now, where the zinc suppliers are negotiating commitments and volumes and premiums for the next year. So, in some ways, there's always some volatility during this part of the season.
Speaker Change: Got it, got it. And one last question I could sneak in. The JV income for the quarters was down sequentially from the recent trends, but you left your JV guide in some change. I'm just curious if that's a timing issue, maybe any kind of color behind that. What are you
Speaker Change: Yeah, that was just a timing issue. I think that we'll see that pop back nicely in Q3 based on what we know at this time. So that's going to bounce back, which is why we held the range of 15 to 18 million.
Speaker Change: So I feel very comfortable about that, that that's going to come in for the year to the midpoint to maybe even the upside of that.
Speaker Change: to
Speaker Change: Great, that's good to hear. Thanks for taking my questions. I've got back in the queue. Cheers, it.
Speaker Change: The next question comes from Matthew Krieger with Fert. Please go ahead.
Matthew Krieger: Hi, good morning everyone. Thanks a lot for taking my questions.
Matthew Krieger: I wanted to focus in a little bit on price cost. What was the specific impact from price cost during the quarter? And then if you could include any impact from the influxions, that would be great. And then first half versus second half, what have you seen already in the first and second quarter from a price cost perspective for the year? And it's impact on either done, and how does that compare to what you had budgeted for the remainder of fiscal 25?
Speaker Change: Yeah, I'll start, Jason may want to add some color here, but for some specifics, maybe I'll be the color guy. You know, when I look at it, so first quarter prices were solid as compared to first quarter last year and actually up. I think second quarter, we, and it's less about competition, but prices were down slightly in Q2 versus Q2 last year. But that was mostly related to mix. So, you know, when we're looking at it in terms of paint costs or in terms of zinc costs, that, yeah, it was, it was just the...
Speaker Change: The mix of business drove the realized, realized price down slightly.
Jason Crawford: We're seeing the normal price pressures, and interestingly enough, it was probably more on the galvanized side, more in the southeast region, where there's 10 to be a little bit more capacity than there's been demand, so prices get affected there earlier rather than later.
Jason Crawford: and I hate to weigh it sounds, but because of the hurricanes, that's going to occupy that capacity in the South East. So that's probably going to flip back over on a go-forward basis in terms of us and our competitors.
Jason Crawford: Um
Jason Crawford: just talked about the zinc volatile, because it's a component of our costs, you know, 20% of sales or so. And we work around it, and we've got different costs of the zinc sitting in our kennels. What we buy on the spot market is, you know, for some of our yard inventories.
Jason Crawford: or to fill some access to manned in a particular region, a specific plant. So for the most part, we're still experiencing the underlying.
Jason Crawford: is the thing that we had bought eight months ago that still trending costs printing down. In terms of paying what they tell me on the pre-coated side is the cost never go down or paint prices never go down.
Jason Crawford: At least that for the time we've owned pre-cote that's been the case. We've got so many different value streams that we bring the bear that, yeah, so we tend to focus on what's the final landed price.
Jason Crawford: and the trend going forward hits.
Speaker Change: as David alluded to, some of the private sector markets and industrial markets have softened, but then there's been a lot of the public influence spending, whether it's for infrastructure bridges, highways, transmission distribution utilities. So we've everything we've got right now. We've factored into our budgets and
Speaker Change: and we're a little better than what we budgeted. For the balance of the year, I'd say our outlook is positive. We're expecting second half this year to be slightly better than second half last year, excluding any hurricane impact in the latter part.
Speaker Change: um
Speaker Change: I don't know that I've answered everything but it's you know that
Speaker Change: Price is our holding and yet just a little bit lower than due to VIX. Our margins are continuing to be strong because we're driving the operational improvements. We've also got a lot of value at services that we provide.
Speaker Change: Ann.
Speaker Change: and then we've had productivity games.
Jason: So Jason, I mean, to be fair, I don't think it left anything else than I can ask to that. I think that the basic summary is...
Jason Crawford: Any change you are seeing in pricing is more related to mixed in pricing fluctuations within the marketplace.
Jason Crawford: We see that play, you know, through the end of the year as well we don't see it in an economic tracing market and the sector path of the year
Jason Crawford: and in terms of economics and place challenges within our supply base.
Jason Crawford: I would say that's very much normalized and very much aligned to our reclicitations and our budgets, and you know, as Tom Haileiki, as you look at our productivity improvements then we're certainly offsetting that with the continuous improvements within the various facilities. So I would say that the second task is very much going to be in line with the forms out in terms of what we'll see. The volatility in that, so obviously that could become a headwind as we get into next year to some extent, but you know I'll come back to.
Jason Crawford: I think that actually could benefit us in some ways because with the demand coming out of the hurricane rebuilding.
Jason Crawford: There could actually be opportunities to increase prices along with that sink cost going up in the overall market, because while we like to talk about our value pricing at the end of the day, there's still some connection to, when customers see sink cost go a lot, they kind of expect us to be raising prices, so...
Jason Crawford: So that'll flip over for us as we get into that next year, but I think there's going to be opportunities both on the productivity side as well as on the pricing side if demand.
Jason Crawford: is stronger than what had kind of been anticipated.
Speaker Change: Got it. That's really helpful. That's great detail. And then just for my second question, you know, big picture, you know, can you provide some added detail on the sustainability of margins at current levels in context of the recent demand fluctuations? Is this current operating environment sufficient to support the over 30% and 20% EBITDA margins respectively in metal coatings and pre-coat? Or do we need a recovery back, you know, somewhere closer to mid-single-digit growth across the business to really sustain those elevated margins, just any thoughts there?
Speaker Change: Yeah, that's a great question. You know, I think Q2, we demonstrated that in spite of the fact that, you know, volumes on the galvanizing side were not that much. And I'd say there was, there was volume to be had, but we then, I think our team on the coding side demonstrated their discipline around not chasing volume from volume stakes, say, but focusing on, on value and profitability. So, while I, you know, on a quarter basis because when volume drops.
Speaker Change: More significantly, given the fourth quarter, depending on what happens with winter, but no matter what happens, construction slows up in the winter once. So when we're talking about weather, we're talking more about the winter versus spring summer fall on the sink.
Speaker Change: So, I think we've got that opportunity given the demonstrated discipline in Q2, as long as we continue that, which we would intend to, you know, we should be able to hold those margins other than, you know, Q4, just when volume falls off as it does, it'll probably drop slightly below 30. We've got to revisit the range and we'll do that as part of our planning process that will kick off here shortly, because 25 to 30 is one too long of a range, too wide of a range and two we've been, I think.
Speaker Change: 5 in the last 6 quarters we've been above 30. So...
Speaker Change: So I think given Outlook, I would hope that we could sustain that at 30-year close to it. On the pre-cow side, it's all about volume, and so when they've got volume, we've talked about they can stay about 20. They're in the same situation in the fourth quarter, construction slows up.
Speaker Change: We'd like.
Speaker Change: But I think 2020 is a good number. It's in the center of the range. Fourth quarter could drop to 19, as we've seen. But our focus right now is on maintaining the good volume and the good mix. So I'm liking the 20s.
Speaker Change: The next question comes from Tim Nataners with Wolf Research. Please go ahead.
Tim Nataners: Good morning. Thanks for including me. I wanted to ask about the common on productivity and market share gains and wonder, are we in what ending are we in and how much more of that could we see in both productivity and market gains?
Speaker Change: Yeah, I think there's a couple of things. One, on the galvanizing side, we're from a productivity perspective, using our digital galvanizing system, and obviously there's still some opportunities with AI and other things that we can streamline and probably more on the, maybe on the G&A side, but operationally.
Speaker Change: and we're continuing to invest in our equipment and infrastructure. But yeah, we're mid to later innings on the galvanizing side, but I think we've still got a couple of years of opportunity to drive productivity and efficiency improvements. Given the fact that, and I'll use this, we've got 41 galvanizing locations, and there's always that bottom quartile that we need to focus on, and bring them up to fleet averages. And so that's why I still say, we've still got a few innings to go on that.
Speaker Change: are really strong facilities, perform consistently at this very high level, you know, we've kind of caught what we're going to get out of those. So we've still got a 20 facilities to go focus on, and I think that's the challenge over the next.
Speaker Change: You know, two or three years is to just work through those and make sure that our playbook is being done.
Speaker Change: Managed with his discipline, the fashion, and every facility as it is in the top performance.
Speaker Change: So, on the pre-cut side, I think we've got investments that we're going to continue to make in.
Speaker Change: in the production lines and give us opportunities to keep those margins high and drive some of that productivity. The team is really, really good operationally, but kind of the same thing. We've got a number of the sites that are performing probably near peak, and then the others that we've got opportunities, so I'd say we're probably in them.
Speaker Change: The media needs, earlier to media needs on the pre-cut side. And we're going to be doing some systems work. We're going to be doing some things with, you know, there is, we do have some tools like coal zone, but bringing in kind of more of the things we can do with DGS and have some opportunities to drive efficiencies and productivity more universally. So I'm optimistic about our opportunities to to main hate and improve margins.
Speaker Change: That's helpful for the productivity part of the question, but on the market share side, do you think there's room to also continue to take the market share?
Speaker Change: Absolutely, because there's, well there's two things and they're a little bit different. We talk about how galvanizing there's still more penetration of hot dip galvanizing into construction and architecture and things like that at the US versus you at Europe . But in terms of taking market share, I think on the galvanizing side as we demonstrated this last quarter, we're very disciplined. And so...
Speaker Change: I think on that side, maintain and market share, we're 35%, 30, you know, market share, at least in what we play in, you know, so pushing that up a little bit, we can do that, but it's not as big of an opportunity in my mind.
Speaker Change: on the pre-codeside, although I've got to be a little bit careful because some of them are highest performing sites are actually volume constrained at the moment.
Speaker Change: as we're in peak season. But you know, so looking to find opportunities for those conversions.
Speaker Change: and I'd be that as market share because when we get a customer to stop painting their own stuff, that's a form of market share gay. And I think there's more of those opportunities on the pre-kitside than there is on the galvanized side. So hi, Deb.
Speaker Change: I put this, you know, fourth inning.
Speaker Change: Okay, super. Thanks, and I'm one more for me if I could, on that couple of occasions I know you've had a really steady dividend, you know, any insights into what could cause that to go up or what conditions you need to increase shareholder returns or think about buybacks in the addition to the dividend.
Speaker Change: Yeah, I think there's a couple of things, one, you know, we're still paying down debt and now that that service is getting cheaper, which is great.
Speaker Change: but for now we're still trying to get ourselves down. I think our current target is more like a two-time leverage, so we're still focused on that. We are looking at the dividend as one opportunity, but that's probably not anything we're going to action this year. And it's dependent on if that acquisition pipeline.
Speaker Change: If we start near some things, then I'd rather get the acquisition done because if we can buy some things for, you know, nicely under our, our leverage, then.
Speaker Change: are our multiple, and I think that's where I've rather spent the money. So we've got the capex investments, investments in some technology as well as the acquisitions.
Speaker Change: and then continuing on the debt side. For now, and I think as we put our plan together for next year and we get to, as we always do, give guidance for the next year and in the late January or early February, we'll talk about that more.
Speaker Change: Okay, great, thank you very much.
Speaker Change: The next question comes from Mark Reichen with Noble Capital Market. Please go ahead.
Mark Reichen: Thank you. I was wondering if you could talk a little bit about how the revenue will ramp up from the new Washington Missouri facility. If I remember correctly, it's expected to generate revenue of 50 to 60 million. So given that fiscal year 2026 starts in February , would you expect to fully realize that in fiscal year 2026 and what is just exactly what does the ramp up look like? [inaudible]
Mark Reichen: I want to say it's an answer to that, since it's a...
Speaker Change: Yeah, yeah, to make sure we're welcome to our testing year through the end of this fiscal year. So really, the line starts to ramp at the start of fiscal year 2026 for us, which is that much time frame that you mentioned. I wouldn't see as in that first year getting to that peak revenue, we'll start to build a line slowly and make sure that operationally we're executing. So really, you've got to get in that second year before you see that full run rate associated with revenue and margins.
Speaker Change: Okay, so...so...
Speaker Change: is to reiterate, I mean, so the ramp up takes how long to kind of get to that.
Speaker Change: Pete Ron Rape
Speaker Change: So, again, if you think about the first year, then we will ramp through that first year, as I think about the second year, you're probably just tailing off that ramp. So in the second year, we'll probably at the lower end of that 50 to 60 million dollar estimate that's out there. I think if you look at the first year, then you could probably have that number into. It's all subject to the customer and the facility operationally that we get up and running. So, those numbers could move to the right and we could get up quicker, but as we look at the light in the customer, then certainly taking a slow cautious approach is going to be a preference.
Speaker Change: Okay, great, and then the second question I have is just, I think we touched on a lot during this call, but just in your view, what are the wild cards in terms of coming in at the low end versus the high end of sales and even dog guidance? I mean, is it more a matter of sales margins?
Speaker Change: Yeah, I think, you know, when we were putting this together, I'll say a couple of things right now, some of the things that...
Speaker Change: The hurricanes are going to be positive for us.
Speaker Change: which you know if a bunch of our facilities had been flooded and overrun like it could have been next.
Speaker Change: So, you know, it's moved from that to the opportunity and upside so I think the low end of our sales ranges.
Speaker Change: is out of the question at this point. We also got off to a strong quarter here in Q3 through September and the outlook for October . So, you know, some of the things that had us concerned with on the sales and EBIDOT side have now been mitigated.
Speaker Change: and probably turn into the positives just recently and in terms of, and then we also feel better about the...
Speaker Change: Equity Income from a bail. So I think the latest news from their third quarter gives us confidence that that's also going to trend to the high end of the range. That's actually a bit of an opportunity.
Speaker Change: or me or sales, but so I think some of the concerns we had, we have less just over the last 72 hours that things have trended positively for us.
Speaker Change: Just one follow-up on that avail. You know, it did have a strong second half last year. Would you expect kind of a similar split in the third, the fourth quarters or a little too early to predict that?
Speaker Change: Now that's exactly what we're predicting because they unlike us, they've got backlogs so they can predict there's a lot better. Yeah, I think you're going to see a similar trend. They're looking at a strong second half and they got it.
Speaker Change: and the Strasp third quarter.
Speaker Change: Well, thank you very much, much appreciated.
Speaker Change: The next question comes from Adam Fowler with Tomson Davis, please go ahead.
Adam Fowler: Hey, good morning guys, nice quarter. Can you talk about visibility on the electrical T&D side? What do you see in there?
Speaker Change: We're seeing it really strong and continuing really strong.
Speaker Change: Things like that, and then of course we're loving data centers too, which does this sort of time wrap it. Our outlook for the next...
Speaker Change: Well, as far as we can see out is very positive and robust, and clearly the hurricane has done some additional damage to the
Speaker Change: on the T&D side, particularly so that just got stronger, too, at least in the short-day intermediate terms.
Speaker Change: and you actually touched on my follow-up question which was data centers and I think last quarter you talked about a data center, then a sit at pre-code.
Speaker Change: Yes, there is, because they paint the candles. And this really, you know, it's great business, and there's just a lot of them being built and a lot more that are going to need to be built. So, good opportunity, and it's one of those that are old electrical groups that's in a veil, is converted to or pre-pay instead of post-paying. So, and they do a lot of data center work. So, you know, we remain excited about that. That's one of those opportunities.
Speaker Change: just exciting to think about.
Speaker Change: Great, and then just for Jason quickly on interest expense, what are you using for the back half?
Speaker Change: I mean, obviously we were and then we re-fying on Sir of Tim Loneby there in September, and then the
Speaker Change: are overall in track races. We're recognizing that we've got, you know, not the 50% of a 10-1 B-fix to our slower per instrument there. So in terms of building that additional 75 basis points which, you know, if you look at our 10-1 B-s is right of us.
Speaker Change: seven million dollars of a rate reduction. Then, certainly that's in fact event at the back half. If you look at the forward curves and what was forecasted in there in our swap arrangement, there's not a huge pick up there, there's more confirmation of what was already in a forecast.
Speaker Change: Okay, good.
Speaker Change: The next question comes from Lucas Pipe with B Riley Securities. Please go ahead.
Lucas Pipe: Thank you very much for taking my follow-up question. You're touched on this throughout the call. But with even that guidance and applying about a 16% decline or so, second half versus first half.
Lucas Pipe: Could you touch on the key drivers there? How much of this is season all versus maybe Changes in mix, Changes in public versus private spending, etc. Thank you for for your color.
Speaker Change: Yeah, great question
Speaker Change: and I say this.
Speaker Change: 100% season, you know, we...
Speaker Change: At this point, given how we started in Q3, we anticipate now the second half of this year is going to be slightly better than the second half last year.
Speaker Change: So I think we had some conservatism in our EBITDA range.
Speaker Change: So we feel good about it, but there is just a seasonal impact on construction volume.
Speaker Change: which we would normally, as things look right now, we'll see that in the fourth quarter, so third quarters, looking fine on a comparative basis from an e-badoch perspective. So we know it's the anything that's going to impact us from a, you know, margins perspective in terms of price levels, some extraneous cost issue. So pure seasonality related to the volume.
Speaker Change: and yet, second half this year better than second half last year.
Speaker Change: Very helpful. I appreciate that color and...
Speaker Change: very quickly on a broader demand backdrop with the recent raid cuts.
Speaker Change: How quickly do you think this would flow through and have you seen already changes in pockets of demand appreciate the polls?
Speaker Change: Yeah, I don't think we've seen much of it at all, I think as the, you know, get through the election cycle as we talk to customers, you know, they're still waiting to see what happens in the election, we need to see for, you know, what's the next.
Speaker Change: Next Ray cut, so I don't know that we've seen much change at all in terms of opportunities, other than we've got customers talking about it.
Speaker Change: and as they, you know, I think it's going to affect their capex plants for next year. And so they're coming up on budget seasons. And so as they budget for that, we could start seeing that as we get into next year and start seeing the impact from those interest rate cuts in terms of project activity.
Speaker Change: and Spend. So, I'm looking forward to that as we, as we now do our budget for our next, as we kick our fires for the next fiscal year, we'll be anticipating some of that and probably it'll affect our our our cap ex-alays a little bit as we, you know, can justify projects easier.
Speaker Change: I really appreciate the additional color. Again, first of all, that's the flood.
Operator: Success that we've had in our focus on the execution and taking care of customers is going to be our focus for the ballot to the year. We look forward to talking to you at the end of a successful third quarter.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Operator: You may now disconnect.